27.1 Chapter 27 Credit derivatives Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 27.1 Chapter 27 Credit Derivatives
27.2 Credit Default Swap Company a buys default protection from b to protect against default on a reference bond issued by the reference entity, C a makes periodic payments to B In the event of a default by c A has the right to sell the reference bond to b for its face value, or B pays a the difference between the market value and the face value Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 27.2 Credit Default Swap • Company A buys default protection from B to protect against default on a reference bond issued by the reference entity, C. • A makes periodic payments to B • In the event of a default by C – A has the right to sell the reference bond to B for its face value, or – B pays A the difference between the market value and the face value
27,3 CDS Structure go bps per year Default Default Protection Protection Buyer, A Seller. B Payment if default by reference entity, C Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 27.3 CDS Structure Default Protection Buyer, A Default Protection Seller, B 90 bps per year Payment if default by reference entity,C
27,4 CDS Final Payments Notation Face value of bond. notional value of cds A(t): Accrued interest on bond per s of principal at time R: Recovery rate, market price as a percent of face value plus accrued interest CDS payment rate per year. Annual payment SL t Time since last CDs payment A pays tsl and b pays L-RL[1+ A(tI Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 27.4 CDS Final Payments Notation: L: Face value of bond, notional value of CDS A(t): Accrued interest on bond per $ of principal at time t R: Recovery rate, market price as a percent of face value plus accrued interest s: CDS payment rate per year. Annual payment = sL : Time since last CDS payment A pays sL and B pays L - RL[1 + A(t)]
27.5 Sample Quotes ( jan 2001) Company Rating 3yr 5 avr 10yr oyota Aa/AAA16/2420/3026/3732/53 Merrill Lynch Aa3/AA 21/4140/5541/83 56/96 Ford A+/A 59/8085/10095/136118/159 Enron Baa1/BBB+105/125115/135117/158182/233 ssan Ba1/BB+115/145125/155200/230244274 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 27.5 Sample Quotes (Jan 2001) Company Rating 3yr 5yr 7yr 10yr Toyota Aa1/AAA 16/24 20/30 26/37 32/53 Merrill Lynch Aa3/AA- 21/41 40/55 41/83 56/96 Ford A+/A 59/80 85/100 95/136 118/159 Enron Baa1/BBB+ 105/125 115/135 117/158 182/233 Nissan Ba1/BB+ 115/145 125/155 200/230 244/274